Boutique fund manager, Morphic Asset Management are currently raising up to $275m for a new fund with a focus on the increasingly popular ethical investments space in global equities. The offer is due to close on 19 April 2017.
Ethical investing involves either actively avoiding companies which play in industries deemed ‘unethical’ or actively targeting companies which play in industries considered ‘positively ethical’. Last year we took a look at the ethical ETFs available on the ASX. They key realisation when we wrote that post was the definition of what is ethical can vary widely. In some cases an ethical fund may exclude only manufacturers of tobacco and weapons (none of which are represented in the ASX200 in Australia), however other funds may have much broader mandates to exclude companies involved in mining, fossil fuels and even things like junk food.
For an investor it may be difficult to find a fund which invests in line with your own ethical values, however the alternative of hunting out their own ethical investments is unlikely to appeal to a lot of investors, so a fund which has ethical values loosely aligned to their own may be the next best option.
Morphic Ethical Equities will exclude investments which involve:
To add a bit of a twist to the typical exclusion of negatively ethical industries, Morphic’s mandate actually allows them to short sell these companies which they state “can be part of (their) ethical investing as it may increase the cost of capital for excluded companies or sectors, and publicise the shortcomings of these companies”.
Above we talked about negative screeners, which is actively excluding companies which do not align with certainly ethical values. Positive screeners are where companies which generate positive ethical outcomes are sought out to invest in. This can be much difficult, as it is easy to exclude a reasonably small amount of unethical companies from a universe of thousands of companies, but finding the small amount of companies which are positively ethical AND are expected to good investments may be much more difficult to find.
Morphic are including a positive screener within the fund, however are limiting the amount of the fund which must meet the positive screener to a minimum of 5% of the fund. The positive screener includes companies involved in the following industries:
Another positive to be added to the list is that Morphic will be donating 2.5% of their management fees to charity, and whilst not the first LIC to do so it is good to see a fund with an ethical bent also postiively contributing.
There’s only one other LIC on the ASX which has an ethical bent, that being Hunter Hall Global Equities (HHV), a fund which has had more than enough publicity in recent times after founder and Chief Investment Officer, Peter Hall, resigned and sold his shares in HHV’s parent company Hunter Hall International. Morphic Asset Management Managing Director, Jack Lownstein's history dates back to a long stint at Hunter Hall. Hall’s share sale was to Washington H Soul Pattinson, a company that now owns 44% of Hunter Hall International, which is somewhat ironic given that some of Soul Pattinson’s biggest investments being coal mines. We are not sure if HHV will maintain its ethical credentials going forward, however assume that they do not have intention to change their management style.
For investors who are prepared to invest in ETFs, there’s a two global ethical options available, UBS IQ MSCI World ex Australia (UBW) and Betashares Global Sustainability Leaders ETF (ETHI), with the UBS offering excluding only weapons and tobacco companies, and the Betashares product having a broader ethical mandate which includes both positive and negative screeners.
As per the usual LIC IPO process, investors in the IPO will be gifted a free option for every share they purchase. These options have an expiry date of around 18 months after listing (30 November 2018). Shares will be listed at $1.10, with Net Asset Value of between $1.073 to $1.079. Investors in the IPO should be aware of the above 2 facts, as exercise of options in the future will result in dilution of capital, and for every $1.10 invested, the investor will actually receive $1.073 worth of shares. Management fees of 1.25% pa and performance fee of 15% of outperformance above the benchmark will apply once the fund is listed.
This post was prepared with publicly available information available from Morphic Asset Management. ETF Watch did not receive any payment from Morphic for this post.